From US$252.80 in July 1999, gold prices reached historic high in March 2008 when it hit over US$1,000 per ounce. In the succeeding months, however, prices have slowly come down to the US$600 mark in October 2008 and around US$950 as of August 10, 2009 .

The yellow metal still commands a good following in an investment community bombarded by a widespread market collapse.

In a November 2008 press release by the World Gold Council (WGC) posted in its website, the organisation affirmed that investors still view gold as an ideal hedge against the overall economic gloom. Figures from the third quarter Gold Demand Trends compiled by the research firm GFMS Limited for WGC show an increase of 45 per cent in dollar demand for gold at US$32billion compared to the previous quarter.

Demand for gold through exchange traded funds (ETFs), bars and coins contributed the most with US$10.7billion (382 tonnes), according to the report. The collapse of Lehman Brothers in September 2008 further boosted demand for gold ETFs as investors exited the equities in favor of safe havens.

Retail consumers have also found themselves purchasing gold to take advantage of current lower prices. Buyers of gold jewellery in India contributed most to the US$18billion consumer demand recorded in the third quarter – a 65 per cent increase compared to the previous year. In 2007, India contributed 23 per cent of overall end-use demand for gold.

The industry’s demand flow from 2003 to 2007 consisted of 68 per cent jewellery, 19 per cent for investment and 13 per cent for industry use. Supply, on the other hand, comprised of 60 per cent from mine production, 25 per cent recycled gold (or scraps) and 14 per cent from the central banks.

Mr Albert Cheng, managing director, Far East for the World Gold Council says contractions in the three components of gold supply – new gold from mine production, scrap gold and those from central banks – will definitely affect the outlook for gold in the long term.

On the demand side, Mr Cheng also sees several challenges. “The jewellery demand will definitely slow down because of recession. People will buy less and we see this will contract in 10 to 15 per cent,” he says.

Industrial demand, however, is quite stable. Gold is used in some industries such as electronics and dentistry. Demand for gold as an investment will also have an impact on price.

In 2007, gold supply totaled $87 billion with above ground stocks currently at $5 trillion. Investors can participate in the gold market in various ways. They can purchase gold bars or coins or open metal accounts. They can also dabble in futures, options and derivative products trading, buy shares in mining companies or invest in ETFs.

Gold ETFs in demand

Compared to other asset classes, gold still remains an attractive hedge against inflation diversify a portfolio. And indeed, investor interest in gold ETFs has been apparent in the performance of the SPDR Gold Shares (GLD) exchange traded fund offered by State Street Global Advisors.

“Although gold has not been performing as well over the last nine months of the year, if you compare the gold to the index and global equity, the GLD outperformed the Singapore market by 56 per cent and outperformed the global equity market by 46 per cent,” explains Sammy Yip, head of ETFs, Asia Pacific at State Street Global Advisors.

Mr Yip says the average trading volume of the GLD grew from US$220,374 to over US$1 million year-to-date in 2008. In the first nine months of 2008, the ETF also had over US$4 billion of net creation.

“The gold asset class is a perfect diversifier. It has demonstrated a negative correlation against asset classes, equity, fixed income or even properties. So if an investor includes gold in their portfolio, it can effectively decrease the overall risk of the portfolio,” Mr Yip says.

He acknowledges that many Asians don’t usually understand the benefit of diversification. “But in the last year or so when the credit crunch and sub-prime came, they realised the need to diversify,” he says.

Open to both retail and institutional investors, the GLD ETF allows investors to participate in the gold market through shares traded in the exchange. A market maker or authorised participant handles the creation and redemption of shares – which represents an interest in a trust consisting of actual gold bullions as assets kept in a vault.

“The product is listed on the exchange so investors can have an access to it in a very efficient manner. As long as you can trade stock in that particular exchange, you can buy the product,” Mr Yip explains.

Advantages offered by the ETFs include liquidity, price transparency, accessibility, low investment cost and no counter-party risk. “ETFs are also flexible. Because it is listed on the exchange so investors can use different trading strategies,” Mr Yips adds.

Some sophisticated investors have in fact used ETFs as short-term tactical asset allocation. Mr Yip, however, cautions that the individual must have great understanding of the dynamics involved in the gold market.

WGC’s Mr Cheng agrees: “For average investors, unless they are very savvy, they should not be looking at gold as a trading mechanism.” He further adds, “The mindset of investors getting into gold should be more in looking at it as a strategic asset class where [it’s like] “I need some in my portfolio”. It’s not a matter of when to get in, but whether or not I am convinced to get in.”

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